What Is A Credit Score?
Credit scores are important when it comes to applying for a loan. It shows your creditworthiness and your repayment history. It represents your credit behavior and generally ranges from 300 to 900. Lenders usually check your score to determine if you can repay the loan on time, so they expect you to have a minimum score above 750 to qualify for a personal loan. Therefore, you must maintain a high score and frequently check it using Buddy Score to track your transactions and credit behavior.
Types of Credit Score
The Credit Bureaus, namely: Equifax, Experian, TransUnion, and CRIF High Mark, generate two main types of credit score models such as FICO Score and VantageScore. These models indicate an individual’s financial stability and repayment ability. Now, let us look at both FICO and VantageScore models in detail.
FICO Score Model
The FICO Score model was first developed in 1989 by Fair Isaac Corporation. 90% of the lenders use the FICO score to determine credibility before offering credit ranging from 300 to 850. In this scoring model, having a good credit score above 750 is considered excellent and helps get a loan at low-interest rates.
FICO Score Table
|Credit Score Range||Credit Ratings|
|800 to 850||Exceptional|
|740 to 799||Very Good|
|670 to 739||Good|
|580 to 669||Fair|
|300 to 579||Poor|
Calculation of credit score using FICO Score Model
|Percentage (%)||Credit Factors|
|35 percent||Payment history|
|30 percent||Amounts owed|
|15 percent||Length of credit history|
|10 percent||Credit mix|
|10 percent||New credit|
VantageScore model was created and developed in collaboration with three major Credit Bureaus (i.e., Equifax, Experian, and TransUnion) as an alternative to the FICO Score model. It has the same range as the FICO score model (300 to 850). VantageScore gives more importance to other factors such as credit utilization ratio, credit balance, etc.
|Credit Score Range||Credit Ratings|
|781 to 850||Excellent|
|661 to 780||Good|
|601 to 660||Fair|
|500 to 600||Poor|
|300 to 499||Very Poor|
Calculation of credit score using VantageScore Model
|Extremely influential||Total credit usage, balance and available credit|
|Highly influential||Credit mix and experience|
|Moderately influential||Payment history|
|Less influential||Age of credit history|
|Less influential||New accounts|
Average Credit Score By Age
The range of average credit score by age varies from generation to generation. Here the age of a person is not a direct factor in calculating credit scores. The table shows the average FICO score by generation compared to 2019 and 2020.
Average FICO Score by Generation
|Silent generation (75+)||757 – Very Good||758 – Very Good|
|Baby boomers (56-74)||731 – Good||736 – Good|
|Generation X (40-55)||688 – Good||699 – Good|
|Millennials (24-39)||668 – Fair||680 – Good|
|Generation Z (ages 18-23)||667 – Fair||674 – Good|
Factors that affect your Credit Score
Payment History: It is one the most important parts of your credit score and accounts for 35% of your FICO score. As a result, it has a larger impact on your score. Lenders assess your payment history to know your credit behavior and repayment ability.
Credit Utilization Ratio: The Credit Utilization Ratio (CUR) shows how much credit you have used to the credit limit. If you use your credit more than the limit, you will have a bad credit score. Hence, you must maintain your credit utilization ratio below 30% of your income.
Credit Inquiries: Whenever you apply for a loan from multiple lenders, they conduct a credit check to check your credit score, generating a hard inquiry. The number of hard inquiries is reflected on the credit report and accounts for 10% of the FICO score model. Hence, multiple hard inquiries will reduce your score affecting your credibility.
Length of Credit History: It accounts for 15% of the FICO score. A long tenure shows that you have a consistent repayment history and will increase your credit score.
Credit mix: It accounts for 10% of the FICO score. Having a variety of credit mixes, such as car loans, home loans, credit cards, etc., shows you can manage various credit without defaulting. It also improves your credit score significantly.
The average credit score by age varies across generations. Moreover, a credit score plays an important role in determining your creditworthiness. And lenders use it as a deciding factor before lending you the loan amount. Therefore, a good credit score is required to get personal loans at the best interest rates using Buddy Loan. You can improve your score by making timely payments, repaying your pending debts, and avoiding multiple hard inquiries.